As a deposit strategy, ‘new money only’ rate offers are a poison pill

To avoid repricing deposits at higher rates, banks and credit unions have attempted to simultaneously use "relationship pricing" and "new money only" offers to manage their book of funding. Fear of funding costs rising may ultimately result in much higher funding costs, and lost profits and franchise value, all while alienating the people who've banked with them for years.

There’s a lot of irony in banking institutions’ deposit strategy right now. Some are using what one banker called a “delay and decay” approach. The idea is to hold out on raising rates for current account holders, allowing those who want a higher rate to decay while hoping the overall volume of the departing deposits will be slight.

Bank and credit union executives say they want to develop deep and broad relationships with account holders. They also proclaim loyalty to depositors who use them as their primary institution. Yet, many offer their highest rates in “new money only” deposit campaigns. Will longtime account holders still feel like they are valued when those with no prior relationship with the institution can obtain a higher rate?

With the Federal Reserve raising interest rates to a 16-year high, the flawed notion of preference for existing relationships has been clearly exposed. Large banking organizations categorically excluding anyone residing in their branch footprint from being eligible for their most aggressive pricing has been documented. In a February article, for example, American Banker covered how “Big Banks Pay Up for Online Deposits, But With a Catch.” It’s part of a bolder “new money only” approach: Rather than quietly outsource funding to a broker network, many are openly promoting that they pay new people more.

 

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